BOC Expected to Cut Rates Ahead of FOMC

The BOC will hold its October policy meeting on Wednesday and announce its decision ahead of the FOMC meeting. The consensus is for another 25 bps rate cut. However, expectations about what the BOC will do have fluctuated, particularly after inflation unexpectedly rose in September. In the end, the USDCAD could show some significant volatility mid-week.

Most analysts point to lingering trade uncertainty as the reason for the BOC to keep on an easing track. Three-quarters of Canada’s exports go to the US, making the country highly dependent on trade with its southern neighbor. Some of that uncertainty has diminished in recent days: US President Donald Trump announced a suspension of trade negotiations, citing a video published by the Ontario government that attacked tariff policy.

CAD Falls Ahead of More Cuts?

The BOC has maintained a dovish stance amid concerns that the trade negotiations between Ottawa and Washington would be prolonged. But there was an element of hope that a deal could be found soon. The announcement that trade talks were suspended would imply that the worst-case trade scenario is unfolding, which would presumably keep the BOC in easing mode.

However, it’s not unlike Trump to make tough trade announcements only to later negotiate further. The restrained market reaction might reflect that perception. However, if trade talks continue for a period of time, the CAD could continue to decline in the days ahead of the BOC meeting.

The Struggle to Find a Deal

The talks between the US and Canada on trade have been particularly thorny, especially considering the usual cordial relations between the two countries. One element is that the USMCA trade agreement is up for renegotiation next year. And it appears that both sides are angling the current trade dispute to gain a more favorable position. Additionally, the current tariff regime doesn’t affect goods and services covered under the existing USMCA, so the economic impact from tariffs is not as pronounced.

As for the impact on the Canadian dollar from a domestic perspective, Canada is one of the few countries to have imposed tariffs on the US in reaction to Trump’s policies. This has raised prices for certain consumer goods in Canada, putting upward pressure on inflation. Meanwhile, trade uncertainty has depressed the economy, leaving the BOC to face a stagflation scenario.

How the Market Might React

The BOC’s position has been to support the economy, helped by inflation remaining within its 1-3% range. But if the BOC were to be forced to keep rates unchanged due to higher inflation, it might not help the CAD. Higher rates would slow economic growth and dampen interest in the currency.

With both the BOC and the Fed in easing mode, the interest rate differential between the countries would remain the same. That means the USDCAD will likely react more to differences in economic performance than to monetary policy.

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